Oil slips from 3-month high before supply data

WilliamL. Watts

SAN FRANCISCO (MarketWatch) — Oil futures settled slightly lower on Tuesday, pulling back from a three-month high as traders looked ahead to the week’s updates on petroleum inventories and a meeting of the Organization of the Petroleum Exporting Countries.

Crude oil for July delivery
CLN4, +0.00%
fell 6 cents, or 0.1%, to settle at $104.35 a barrel on the New York Mercantile Exchange, after tapping a high of $105.06.

Prices pulled back from the session’s highs after settling at $104.41 on Monday — the highest for a most-active contract since March 3. They posted the biggest one-day rise — up $1.75 or 1.7% — in about two months.

Strategists said oil remains underpinned by recent data, including last Friday’s U.S. nonfarm payrolls report for May, an upward revision to Japanese economic growth and Chinese trade data.

Chinese exports soared 7% last month, as “consumers world-wide bought up Chinese-made goods,” said analysts at the Kilduff Report. “This helps everyone look past China’s internal problems and take a more positive view of their economic prospects going forward.”

Strategists also said a decision by Chinese authorities to loosen reserve requirements for the nation’s banks also boosted sentiment.

Meanwhile, prices continued to find some support from concerns over Libya’s output, analysts at the Kilduff Report said. “The situation just does not improve.” And over in Iraq, the security situation “troubling, with Mosul City being overrun by Sunni insurgents.”

Late Tuesday, the oil market will also get an update on U.S. petroleum supplies from trade group the American Petroleum Institute, with government data due out Wednesday morning from the Energy Information Administration.

Analysts polled by Platts forecast a decline of 1.2 million barrels in crude stockpiles for the week ended June 6. They expect gasoline inventories to fall by 500,000 barrels and forecast a climb of 750,000 barrels for distillates, which include heating oil.

On Nymex Tuesday, July gasoline
US:RBN4
closed at $2.975 a gallon, down 1 cent, or 0.4%, while July heating oil
US:HON4
fell less than a penny to $2.88 a gallon.

OPEC summit

Traders also awaited the start of the first meeting this year of OPEC on Wednesday in Vienna. The oil-producing group’s 30-million barrel-per-day production target, which has been in place for at least two years, is expected to be maintained.

But a confirmation of the production target is unlikely to prevent oil prices from falling over the next year or so, according to Tom Pugh, commodities economist at Capital Economics.

Saudi Arabia has said it is willing to cover any supply shortage in the market and the country currently has as much as 2.5 million barrels a day of spare capacity, he said in a note, adding that the amount could be used to meet any increase in demand or if output from other OPEC members fall short.

Pugh said he sees the price of Brent crude dropping back below $100 in the coming months. He has an end-year forecast of $95 a barrel for the European benchmark.

On Tuesday, July Brent crude
LCON4, +0.33%
settled at $109.52 a barrel on the ICE Futures exchange, down 47 cents, or 0.4%.

In a monthly report, the U.S. Energy Information Administration raised its 2014 forecasts for West Texas Intermediate and Brent crude prices.

The government agency said it expects WTI prices to average $98.67 a barrel this year. It previously forecast a 2014 average of $96.59. The EIA also said it expects Brent crude to average $107.82 a barrel this year, compared with a previous forecast for $106.26.

China ‘golden age’ for natural gas

Prices for natural gas on Nymex also declined, with the July contract
US:NGN14
down 11.5 cents, or 2.5%, at $4.53 per million British thermal units after falling 1.4% in the previous session.

Bloomberg News

A San Diego Gas & Electric meter.

But in a report issued Tuesday, the Paris-based International Energy Agency said that the “golden age” of natural gas has “firmly established” itself in North America and will expand to China over the next five years.

The IEA expects that global natural-gas demand will rise by 2.2% a year by the end of 2019, and much of the demand will be met by liquefied natural gas.

“In China, where air-quality concerns are prompting the government to adopt tough plans to reduce pollution, gas is emerging as a major part of the solution,” the IEA report said. “The power, industrial and transport sectors will drive overall Chinese gas demand to 315 bcm [billion cubic meters] in 2019, an increase of 90% over the forecast period.”

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